The Bank of England’s Alex Brazier fears a ‘spiral of complacency’.
Photograph: David Levene for the Observer

Britain is on a consumer credit binge. Over the past year, growth per head of population has increased by 1% while the amount consumers have racked up – on their credit cards, on car finance and in unsecured personal loans – has increased by 10%.

What’s happened is simple. For many employees, a decent wage increase is a thing of the past – but borrowing is cheap and easily obtainable. Living standards are under pressure because prices are rising more rapidly than earnings, and that is forcing consumers to retrench. The belt-tightening would be even more pronounced were it not for the willingness to load up on credit.

Banks and other lenders have responded to a prolonged period of low interest rates and modest growth by making the terms for borrowers more attractive. It is now easier – at least in the short term – for someone to transfer their credit card balance from one company to another. The average advertised interest rate on a £10,000 loan has fallen from 8% to 3.8% in the past year.

As Brazier noted, these are classic signs of lenders thinking the risks are lower than they actually are. He used particularly strong language (for Threadneedle Street) in warning lenders that they were dicing with a “spiral of complacency”. The Bank is prepared to act within the next two months if it thinks there has been insufficient action on the part of lenders to prevent the damaging popping of a credit bubble.

Only once has the household debt to income ratio been as elevated as it is now, and that was 10 years ago, when the economy was on the cusp of its deepest recession since the second world war.

Most of the debt is secured against bricks and mortar, but a rising chunk of it is accounted for by personal loans, unpaid credit card debts and car loans.

It was the willingness of consumers to take on extra borrowing that allowed the economy to surf through the first six months after the Brexit vote a year ago. To an extent, this was perfectly rational behaviour: consumers could see that prices were going to rise due to the fall in the value of the pound, so they loaded up on credit so that they could bring forward purchases.

Some spending that would normally have taken place in the first half of 2017 actually happened in the second half of 2016. The fact that outstanding consumer debt is still rising suggests that people are no longer borrowing to fund luxury purchases but rather to make ends meet.

To an extent, rising consumer debt is a problem of the Bank’s own making. Its monetary policy committee has kept interest rates at 0.5% or lower for more than eight years, making it easier to keep up the payments on loans. Now the Bank’s other big policy body – the financial policy committee – is worried that the borrowing could get out of hand.

Both the MPC and the FPC need to be careful. Even quite modest increases in official interest rates would be a problem for many debt-dependent households.

Meanwhile, if the FPC makes it harder for consumers to obtain credit from mainstream lenders, there is the risk that they will drive the borrowing underground.

Ultimately, rising consumer credit is symptomatic of a wider problem: the absence of real wage growth. Since the economy plunged into recession in early 2008, real GDP per head has increased by less than 2% – comfortably the most miserable performance, apart from times when Britain has been at war, since records began in the first half of the 19th century.

Debt has been rising because wages, once adjusted for inflation, have moved sideways. And wages have moved sideways because productivity growth has stalled.

The way to break the UK’s serious credit habit is to develop a different growth model to replace one that is clearly broken.

In the meantime, lenders would be well advised to heed Brazier’s warning. The Bank does not use phrases such as “spiral of complacency” lightly. It fears boom will lead to bust. Lenders can either exercise a bit more caution voluntarily or the Bank will force them to do so through credit controls.